Pennsylvania Senate Republican Caucus

Senator Regola speaks at January 29th press conference

SB 7 (Constitutional Amendment Version)

SB 707 (Statute Version)

Senator Folmer speaks at January 29th press conference

HARRISBURG - (1/9/08, 11:00 a.m., Room 418, Main Capitol)

The House Republican Policy Committee held a public hearing on House Bill 1092 and House Bill 1641, regarding Personal Income Tax reduction.

HB 1092 Quigley - (PN 1561) Amends the Tax Reform Code further providing for personal income tax imposition. The imposition of the income tax for both residents and nonresidents is changed by adding additional rates as follows: (1) 3.07% for the first half of the taxable year commencing with or within calendar year 2007(2) 2.93% for the second half of the taxable year commencing with or within calendar year 2007 and (3) 2.8% for the taxable year commencing with or within calendar year 2008 and each taxable year thereafter.

HB 1641 Quigley - (PN 2116) Amends the Tax Reform Code by lowering the personal income tax from 3.07% to 2.99%.

Members in attendance included Chairman Mike Turzai (R-Allegheny), Rep. Ron Marsico (R-Dauphin), Rep. Thomas Quigley (R-Montgomery), Rep. William Adolph (R-Delaware), Rep. Carl Mantz (R-Berks), Rep. Rosemarie Swanger (R- Lebanon), Rep. Steve Cappelli (R-Lycoming), Rep. Scott Hutchinson (R- Venango), Rep. Jay Moyer (R-Montgomery), Rep. Tina Pickett (R-Bradford), Rep. Jess Stairs (R-Westmoreland), Rep. Glen Grell (R-Cumberland), Rep. Bernie O'Neill (R-Bucks), Rep. Douglas Reichley (R-Lehigh), Rep. Sam Rohrer (R-Berks), Rep. Fred McIlhattan (R-Clarion), Rep. Daryl Metcalfe (R-Butler), Rep. Richard Stevenson (R-Mercer), Rep. Scott Perry (R-York), Rep. Tim Hennessey (R-Chester), Rep. Paul Clymer (R-Bucks), Rep. David Millard (R- Columbia), Rep. Gordon Denlinger (R-Lancaster), Rep. Mario Civera (R- Delaware), Rep. Mike Vereb (R-Montgomery), Rep. George Kenney (R- Philadelphia), Rep. Karen Beyer (R-Northampton), Rep. Brian Ellis (R-Butler), Rep. Mauree Gingrich (R-Lebanon), Rep. Mario Scavello (R-Monroe), Rep. Kerry Benninghoff (R-Centre).

Matthew Brouillette, President and CEO, The Commonwealth Foundation told the committee that reducing taxes on personal income is critical for the economic health of families and businesses that create jobs in Pennsylvania. He stated that since Pennsylvania's Personal Income Tax rate went from 2.8 to 3.07 percent in late 2003, we have been at a competitive disadvantage with other states. Pennsylvania ranks 38th in the nation in job growth, 40th in personal income growth and 42nd in population growth under Governor Edward Rendell's tenure. He also spoke against economic development funding for politically selected business and government projects at the expense of other parts of the economy. He went to say that "…states that cut taxes the most over the past 10 years were among the fastest growing." He concluded by saying to continue to tax jobs and incomes at the 3.07 percent rate, we will have less job and income growth.

Ronald Sniegocki, President, Sniegocki Financial Services, on behalf of small business people, emphasized the need to return the Personal Income Tax rate to 2.8 percent. He noted that if that happens, "…you will be returning money to the small business engines of the Pennsylvania economy." He noted that if money is returned to small businesses in the form of a lower personal income tax rate, they will use it to buy needed equipment and hire additional employees. He also argued for small businesses to "…be afforded the same consideration large corporations enjoy in the area of business loss recovery." Finally, he urged the members to reduce the personal income tax burden, align the state tax code with federal laws, and to pass legislation to allow small businesses to carry-forward losses as large corporations can do, to reduce their tax burden in the early, formative years of the business.

· Kevin Shivers, State Director, National Federation of Independent Business, said the personal income tax is just one cost of doing business. In the past five years, he noted, it has been compounded by higher registration fees, business licensing fees and other costs that are making it harder to do business in the Commonwealth. He said the legislation being considered is a step in the right direction in reducing the business tax load. He added that streamlining the state tax code is a good way to reduce the cost of doing business for small firms. He explained that small businesses often have the added expense of hiring tax professionals to advise them on depreciation rules and other intricacies of the tax code when they have their tax returns prepared. He said while large companies have tax experts in-house, small businesses must take more time away from managing their companies to prepare their taxes and navigate the state tax code, which detracts from their ability to operate their companies efficiently.

Chairman Turzai asked Brouillette about the effect on taxpayers from the local earned income tax in addition to the increase in the 2003 hike in the state personal income tax. Brouillette responded by saying that along with the increase in the personal income tax, additional fees on things like cellular phone service and an increase in the minimum wage rate all have had an affect on business expansion and job creation. He said his foundation's model on economic impact did not take into consideration local earned income taxes. He said that although the personal income tax rate is flat and relatively low, taxpayers here don't get certain deductions they do in other states, consequently the marginal rate that is paid is higher than in other states. He added that there are six states with no personal income tax and that is the "…group we ought to be looking to join."

Sniegocki added that additional taxes small businesses pay for workers' and unemployment compensation add to their burden. He also said it would be helpful if the collection of other taxes, such as local earned income and school taxes, could be streamlined and done only at the state or county level so small firms don't have to comply with tax payment requirements from numerous municipalities.

Rep. Quigley asked about the modeling program Brouillette referred to in his testimony which The Commonwealth Foundation used to analyze the potential impact of the personal income tax on Pennsylvania producers, households and government. Brouillette explained that it was constructed by economists at the Beacon Hill Institute at Suffolk University in Boston, Massachusetts. He said several state governments use the complex model to analyze the affect of taxes on their economies. He noted that it could be used to analyze the potential impact of HB 1092 and HB 1641 on the state's economy.

Rep. Quigley wanted to know more specifically what the concerns are of small business people on the personal income tax. Sniegocki said that if money is taken out of the hands of a small business owner, they would not be able to add a piece of equipment they need, they may not be able to hire additional employees, they will not be able to reinvest in their companies. He emphasized that anything returned to them would be used wisely and the money would be put back in their firms as they "live their jobs" and want to be successful.

Rep. O'Neill requested information on states that have lowered their taxes and experienced economic growth, referred to by Brouillette in his testimony. Brouillette said he would provide that information to the members, as well as a study done by the Legislative Budget and Finance Committee on economic development spending that he had mentioned previously.

Rep. Stairs wanted to know if the panelists believe it is true that lowering taxes would generate more revenue and how much money a lower personal income tax rate would generate for the states revenue coffers. Sniegocki said the Reagan tax cuts of the 1980s and the Bush tax cuts "…generated more economic activity at all levels and that has been proven time and time again." Brouillette said the compounding effect is where "…we will benefit over the long haul." He said lowering the personal income tax would reduce revenue to the state in the short term, but would increase revenue in the long term as businesses generate more economic activity.

Rep. Stairs asked for suggestions from the panel on how to reduce taxes over the long term. Shivers said from the perspective of NFIB members, they would suggest passing a Constitutional amendment to limit state spending. He added that taxpayer protection legislation that has been discussed the past few years, allowing state spending to increase only by the rate of inflation plus population growth, would be one way to manage future growth of government. Brouillette said ten years ago the state budget was $10 billion and today it is $26 billion. He questioned if the state is getting better government for the additional approximately $1 billion per year it has been spending. He emphasized the need to limit government spending to guide good economic growth long into the future.

Rep. Marsico said it is too bad that more members do not understand that more taxes and more mandates stifle small businesses. Sniegocki said big businesses can take care of themselves, but small business people are just trying to make a living every day and taxes are a much larger burden on Main Street businesses.

Rep. Stevenson said small businesses are the backbone of the economy in Pennsylvania. He asked Brouillette to repeat some of the statistics he cited earlier and the effect the legislation would have on employees in Pennsylvania if the personal income tax was reduced. Brouillette said his organization's model projected that if the personal income tax had not been increased on Jan. 1, 2004, the state could have created enough jobs to make the state rank 33rd, instead of 38th in the nation in job creation.

Rep. Metcalfe wanted the panelists input on giving taxpayers at the local level the ability to inhibit local governments from spending more, perhaps through ballot referendums, thereby limiting their ability to add to the tax burden. Sniegocki said that less government is better government. He said as a former borough councilman and school board member, he disagrees with using the status quo of building each year's budget using the previous one. He suggested starting from scratch each year to develop local and state government budgets. He said he favors voter control on school boards and they should have the right to say no to more spending and that the Pennsylvania State Education Association and the Pennsylvania School Boards Association oppose that because they know what will happen if citizens are given more control over spending.

Rep. Denlinger inquired about the tax rates of states south of Pennsylvania, particularly Virginia and the Carolinas. Sniegocki said most state rates on business taxes more closely model those of the federal government than do the Pennsylvania rates.

Rep. Denlinger queried if those states are taking business away from Pennsylvania. Brouillette said The Tax Foundation has done a study on that and he would provide the information. He said the southern and western states are taking our population with a more favorable business climate. He said we are not outsourcing, but rather "outforcing" jobs and population with more favorable business climates and that New York and New Jersey are not our competition as much as southern and western states.

Rep. Pickett expressed concern about the combination of health insurance costs, as well as tax rates, and if these inhibit potential entrepreneurs from taking the risk of starting a new business. Shivers responded by saying corporate welfare programs should be curtailed and small businesses should be helped more. He found it ironic that the only tax break in the state budget last year was for a Hollywood film corporation. He said the imperative this year for tax rates to be reduced across the board to help reduce the cost of doing business for small employers. Brouillette said the tax break the Lions Gate film company received last year is taking money away from the potential business man or woman who is working to develop a small business in the garage or basement of their home. He said the state should not be subsidizing businesses such as Comcast in Philadelphia or PNC in Pittsburgh or any other big conglomerate that has the ability to hire lobbyists to get money from the Department of Community and Economic Development.

Rep. Millard asked the panelists to peg a timeframe in which the reduction in the personal income tax could take place. Brouillette responded by saying businesses are planning for five and ten years into the future, while the Legislature is only looking at the next year. He said the Legislature must look farther into the future when it sets tax policy. Shivers said businesses want stability and predictability in tax policy, regulatory matters and other areas that affect their business. Without a more long-term policy from the state, businesses are less reluctant to invest in their companies, so a long-term vision should be developed.

Rep. Cappelli asked if they think the General Assembly can address property tax reform without the personal income tax being a part of the equation. Brouillette said that is the million-dollar question. He said there is a good discussion going on but the talk is more about tax shifting. He views consumption taxes as better than property taxes. He said a plan which addresses the sales tax would be the best one to consider. Shivers said NFIB members are asking "Where does this end?" with regard to spending more in public education spending and where to get the money, from property taxes, sales taxes, or other sources. Sniegocki said school spending is driving property taxes and that "…we are the only state that allows nine local school board members to spend us into oblivion." He said local control over school spending must be returned to the taxpayers and to raise the rate on a broad-based sales tax is fairer than using other tax methods to raise revenues.

Rep. Beyer said she hasn't heard presidential candidates talking about the number one issue on the minds of most people - the economy. She feels tax policy should be discussed more by the candidates and wanted to know if any of the panelists remembered any previous effort to go to zero-based budgeting instead of building each year's budget based on the previous one. Shivers said spending is on the mind of taxpayers and while the governor proposed seven new taxes last year and the Legislature rejected them, the era of more state spending at a rate greater than inflation is coming to an end. Sniegocki said a recession is inevitable and that is a necessary correction in the national economy but he isn't sure how long it will last. Brouillette said that after 9/11, states that had limited their state spending were not as hard hit economically as those that had not limited spending. Brouillette also noted he doesn't remember a specific proposal to use zero-based budgeting in Pennsylvania, that Rep. Rohrer has talked about it and that several other states use the method.

Rep. Turzai said there has been some discussion of using zero-based budgeting for the budget cycle coming up and that is something that should be considered. He then concluded the meeting by saying the two bills under consideration will be amended in the House Finance Committee to make the provisions in them effective July 1, 2008.

House Republican Caucus issue briefing and legislation summary.

Rick Morrison

April 26th hearing at Seton Hill University.

April 26th hearing at Seton Hill University.